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The following segment was excerpted from this fund letter.
We recently initiated a position in Ashtead Group. The company is domiciled in the UK, but the business is essentially North American. The United States and Canada account for all but a tiny sliver of earnings, and the American CEO and his key lieutenants are all based Stateside. Ashtead, operating under its Sunbelt brand, is a leading player in the equipment rental industry. The advantages of renting equipment, as opposed to buying it, are straightforward. By renting, customers preserve capital, reduce the significant overhead associated with equipment maintenance, and indirectly harness the purchasing power of the large rental companies.
The logic of rental has been transforming, in slow and steady fashion, the US equipment market for many years already. According to the American Rental Association, rental penetration in the US is currently in the mid-50% range, up from the mid-40% range a decade ago. Industry participants and observers alike expect rental penetration to increase further, as rental players enter new equipment categories and offer new rental models.
The structure of the US equipment rental market is telling. Last year, the top ten players accounted for approximately 32% of it. A decade ago, they accounted for approximately 20%. Virtually all the market share gains made by the top ten players over the past decade have accrued to the top two players, Ashtead and United Rental (URI). Last year, these two leaders accounted for approximately 20% of the US equipment rental market. The logic for this ongoing consolidation is no great mystery: In the equipment rental business, bigger is better. Scale drives equipment purchasing advantages and operating efficiencies.
We expect rental's penetration of the US equipment market to increase in the years to come, and we expect Ashtead's share of the equipment rental market to rise as well. Ashtead is highly likely to be a bigger business in the future. The market trends are well established, and the source of the company's advantage is easy to apprehend.
Ashtead's business is economically sensitive, though less so than it used to be. Less cyclical "Specialty" and "Maintenance, Repair, and Operations" lines now drive almost a third and a fifth, respectively, of total revenues. Non- commercial construction lines, which are more cyclical, now account for less than half of total revenues. Further, North America is witnessing a boom in what industry observers call "Mega Projects," those worth more than $500 million. Mega Projects also tend to be less cyclical than typical non-commercial construction projects, in part because they are huge and therefore difficult to pause, and in part because they are driven by the secular onshoring trend that has gathered steam in the face of emerging geopolitical realities and is supported by over $1 trillion of US government spending.
We believe Ashtead is advantaged over almost every other competitor. Ashtead's financial track record is excellent across the board. All the feedback we have collected from customers, competitors, and former managers has confirmed what the numbers indicate, namely that Ashtead is best in the business when it comes to its leaders, people, and culture.
We have been studying and watching Ashtead for several years. We finally acted when concern over the macroeconomic outlook provided a window of opportunity. We purchased our shares at roughly 13x consensus earnings per share over the next twelve months. If the economy weakens significantly, Ashtead's business will likely slow and perhaps even decline. However, the price we paid for our shares should allow us to earn an attractive long- term return across a wide range of economic scenarios.
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** It is the intention of Ruane, Cunniff & Goldfarb L.P. (the "Adviser") to ensure the Fund does not pay in excess of 1.00% in Net Annual Fund Operating Expenses. This reimbursement is a provision of the Adviser's investment advisory contract with the Fund and the reimbursement will be in effect only so long as that investment advisory contract is in effect. The expense ratio presented is from the Fund's prospectus dated May 1, 2023. For the year ended December 31, 2023, the Fund's annual operating expenses and investment advisory fee, net of such reimbursement, were 1.00% and 0.89%, respectively. The Fund is non-diversified, meaning that it invests its assets in a smaller number of companies than many other funds. As a result, an investment in the Fund has the risk that changes in the value of a single security may have a significant effect, either negative or positive, on the Fund's net asset value per share. The S&P 500 Index is an unmanaged capitalization-weighted index of the common stocks of 500 major US corporations. The Index does not incur expenses. It is not possible to invest directly in the Index. | ||||||||||||||||||||||||||||||||||
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